The problem with this type of financial voyeurism is that we’re often comparing apples and oranges. Take net worth, for example. It’s supposed to be a snapshot of your financial health at a particular moment in time. But everyone seems to have their own variation or twist on what to include (and what not to include) in their net worth statement.

How to calculate net worth

We all have different ideas on what’s considered an asset and a liability, however, which can lead to confusion when trying to compare results.

Here’s the thing: The correct formula for calculating net worth is the one you use consistently over time to measure progress. That’s it.

I track my net worth twice a year and often get questioned why I include – or don’t include – certain items in my calculations. Here are some common differences I’ve come across in net worth updates:

Value of RRSP

Some people insist on discounting the value of their RRSP to account for the taxes they’ll have to pay upon withdrawal.

For example, if you had $100,000 in your RRSP today, you might list its value at just $60,000 to adjust for taxes owing in retirement.

A question for those who track their RRSP this way: Do you also include the estimated present value of your CPP and OAS benefits in your net worth statement?

I include the full value of my RRSP in my net worth calculation for the simple reason that I’m looking at a snapshot of my current financial situation. I’ll adjust my net worth accordingly when I convert my RRSP into a RRIF and start withdrawing retirement income.

Value of RESP

We put $400 per month into RESPs for our two daughters. I include the RESP balance in my net worth calculation because that money legally belongs to the parents (subscriber) until it is paid out to the children (beneficiary).

Of course, we have no intention of keeping the money for ourselves, but we’ll adjust our net worth accordingly once it gets paid out.

I can see why some people don’t include RESPs in their net worth calculations, but I like to track it because the contributions are fairly significant – it’s savings for a future need.

Value of your home

Some people peg the value of their home at the initial purchase price and never adjust for market value. Others go off of their annual property tax assessment, while some more in-tune with the real estate market may value their home at the most current market estimate.

I started with the purchase price of our home and then simply adjusted it annually by 2.5%. We developed the basement a few years ago so I just used the cost of the renovation to bump up the market value by $25,000.

I’ve even heard of some net worth statements that don’t include your primary residence in the calculation. Accredited investors, for example, must have a net worth greater than $1 million, but their primary residence is not counted as an asset in the calculation.

Pension assets

How can you put a value in today’s dollars of a defined benefit pension plan designed to pay you a monthly income when you retire? And what if that’s years, or even decades away?

There are several ways you can account for your pension assets in a net worth statement.

You can add up and track all of your contributions to the plan, or you can include your contributions along with your employer’s contributions.

Finally, you can use the commuted value of the pension, which is the lump sum paid to you if you left the plan today. This amount should be listed in your annual or semi-annual pension statement.

Vehicles (include, or not?)

It can make sense to include the value of your vehicle(s) in a net worth statement, along with any corresponding loans, if applicable.

However, it can be a pain to track the value of a depreciating asset every time you prepare a net worth calculation.

I see our vehicles as an expense. Sure, I could add $15,000 – $20,000 to my net worth if I sold one today, but then I’d have to buy another car to replace it. If I sold my house, on the other hand, I could pocket the sale proceeds and just rent another place. That’s probably not realistic with a vehicle.

A word on budgeting

The same caveat goes for budgeting – maybe even more so. I often hear questions about how much one should spend on groceries in a month. The answer has so many variables that it’s impossible to give any useful advice without more information.

Are you single, or trying to feed a family of five? Do you live in Nunavut, downtown Calgary, or somewhere in the Maritimes?

Not to mention the loaded question about what constitutes “groceries”. Does that just include food, or do you lump other household items under the grocery category?

For simplicity I include food and household items in the “grocery” category of my budget. That means when I shop at Safeway or Costco I’ll throw the entire bill into “grocery” expenses. Unless there’s something obvious like clothing, or a shovel, in which case I’ll split those off into separate categories.

Again, when comparing budgets you need to compare apples to apples before you draw any conclusions.

Final thoughts

Keep it simple, folks (and consistent). The right way to calculate net worth is to use the same formula every time. Don’t be swayed by how others track their results. The whole point of tracking net worth is to measure your progress over time.

Get excited because you moved the needle forward, not because you changed yardsticks halfway through the game and saw an increase.

Comparing results can be dangerous if you’re not playing by the same rules.

16 Comments

The right way to measure net worth depends on what you’re doing with the answer. If you’re focused on the progress from one point in time to another, many of the details of now you measure net worth don’t matter as long as you’re consistent.

However, I use my net worth for another purpose as well: judging whether I have enough to retire. For this purpose, I don’t include my house because I’d prefer not to have to sell it. I also discount my RRSP by my estimated average tax rate, and discount my non-registered assets to account for dividend and capital gains taxes. And I discount my expected CPP and OAS payments to account for taxes. Then I can compare my safe monthly withdrawal amount to mt expected expenses. There is a lot of estimating in all this, but it’s critical to factor in taxes.

Hi Michael, there’s a time when this exercise becomes something different altogether – shifting from accumulating assets to a more critical analysis on turning those assets into a retirement income stream.

I completely agree that using the same formula consistently over time to measure your own progress is the way to do it. While it may be fun to look at someone else’s net worth, it’s much more important to understand your own and to increase it over time. Not only might there be differences in calculations between you and someone else, but obviously no two people have the same situation in life and so many of our non-financial choices can affect our net worth.

Hi Gary, it’s an over-used generalization but there’s a reason why it’s called “personal” finance. I think it’s okay to compare your finances to others who might be in a similar situation, but it’s more important to keep laser-focused on your own goals and progress.

I’ve been wondering about a few of those categories myself. I don’t own a home, so that’s an easy one, and I refuse to add my car or my “planned spending” account (my “savings” account for furniture and a trip).

I also find these same challenges when people talk about their savings rate. You’ll read that someone had a 50% savings rate only to discover that it covers things like vacations, saving up for a large purchase and paying off debt. Yes, paying off debt improves your net worth, but I wouldn’t call it “savings” because it’s money you’ve already spent.

I also don’t consider putting money aside for a large purchase to be part of one’s savings rate because it’s money to be spent in the short term. I guess you could say that retirement savings are putting money aside for future purchases too, so where do you draw the line?

Hi Beth, you bring up a great point about planned spending. I mean, at the end of the day all of our savings might be considered planned spending (eventually) but short-term savings for a vacation is just deferred spending.

I have to agree with Robb. Although I do my net worth statement every month.
This has more to do with my retirement outlook than with how much I own.
I add my home value (+5% annually divided over 12 months) plus my bank saldo, my investments (RRSP and TFSA, etc) and deduct my mortgage and monthly credit-card amount. As long as you do the same thing every time I think you will get the picture you’re looking for. I pay all my expenses with my C Card so I know how much my monthly expenses are, approximately. How much I need in retirement but it is hard to know how much tax you’ll pay at that time, so I have another spreadsheet I use for Income versus money after taxes. I hope that by using this I can figure out, within reason, how much income I need to pay my credit-card at the end of every month by the time I retire. For some bigger expenses I make a note in my statement because you won’t buy a lawnmower every month but I may need to buy one in a few years when I retired so it is an expense I will encounter and have to budget for.

Totally agree – just keep it simple and consistent so you can reliably measure your progress. No need to get too technical in the analysis.

I include the following:
– house (don’t appreciate it, just use purchase price)
– cars (depreciate them when I feel like it to what I guesstimate the value to be)
– RRSP (full value before taxes)
– Don’t add CPP/OAS
– Don’t add RESP

Hi Stephen, thanks for stopping by and sharing what you include in your net worth calculation. A great example of apples and oranges if we’re comparing net worth with each other. I include a bit of home appreciation, but don’t include the vehicles. I also include the RESP balance, so my calculation might be higher for no other reason than how we categorize assets.

I do a quarterly net worth statement, which includes everything but also calculates a discounted Net Worth total for things like cars, retirement accounts, personal property and our businesses, where liquidity and/or accuracy of estimation is a factor. The discounted figure tends to be about 30% lower, but I think having and acting on both keeps us honest about what we have.

I’m glad I read this. I’ve been tracking my net-worth for months now and haven’t figured out whether I should include my pension (and home value when I finally find a house) into my net-worth… For my pension, I’ve left it out of my net-worth entirely but now thinking I should at least add my portion up.

And when I get into my first house, I think I’ll add the mortgage/equity into the calculation. It would be a more accurate picture of our finances. It’s such a major “something” that should be considered in some capacity!

I also learned about possible things that I don’t have yet that will come up in my future… RRSP and RESP! Hmm…

There are a lot of comments on this issue, what to include and what not. But the principal is still very simple, Net Worth is what you own minus what you owe.
So if you buy a house put in the value and deduct the mortgage, this incidentally is your equity so no need to add this, it comes out in the final figure anyway.
Your pension as well. Put in what you own not the amount you may get if you stay with the company for another ten years or so, how much do you own today. Same with RRSP and other investments. When your young and just starting out this number may be small but it is satisfying to see it improve and increase over time.

As we’re in an accumulation phase for tax-deferred retirement assets (RRSP, professional corporations) and I subtract the anticipated future tax liabilities to calculate our net worth. It’s a little distressing to see the liabilities side of the ledger rise every month despite taking on no new debt and paying our mortgage with a few extra principal payments.

I’m very fortunate because I’ve elected to hold my pension entirely in company stock, which makes it really easy to include it in my net worth. This doesn’t pose any diversification issues because the company stock currently only accounts for something like 12% of the overall pie.